Global Macro Trading Journal

Portfolio update

upload_2020-6-10_12-39-29.png
 

Attachments

  • upload_2020-6-10_12-39-12.png
    upload_2020-6-10_12-39-12.png
    276.9 KB · Views: 11
My USD exposure has been coming down and I plan to reduce it further should the dollar index lose the 95 and 90 levels. I still havent decided which currency to go to though
 
Here is an ugly truth some investors dont seem to realize, in one hand they say "its ridiculous to own the 10y treasury at 0.6% or the 30y treasury at 1%" on the other hand they say "stocks are cheap relative to interest rates". Both of these things dont go together because if you are long stocks due their 'cheapness to interest rates' you are also long bonds!

In the sense that if bonds were to collapse and rates rise (The fed does not control long-term interest rates), stocks would not longer be cheap vs interest rates and therefore stocks would collapse with them!

This is the reason why I'm skeptical of being long US stocks in a period of rising deficits, rising deficit monetization, record liquidity injections and future entitlement problems.
Stock investors are now bond investors, whether they are aware of it or not!
 
Daal said:
Here is an ugly truth some investors dont seem to realize, in one hand they say "its ridiculous to own the 10y treasury at 0.6% or the 30y treasury at 1%" on the other hand they say "stocks are cheap relative to interest rates". Both of these things dont go together because if you are long stocks due their 'cheapness to interest rates' you are also long bonds!

In the sense that if bonds were to collapse and rates rise (The fed does not control long-term interest rates), stocks would not longer be cheap vs interest rates and therefore stocks would collapse with them!

This is the reason why I'm skeptical of being long US stocks in a period of rising deficits, rising deficit monetization, record liquidity injections and future entitlement problems.
Stock investors are now bond investors, whether they are aware of it or not!
More...

Sort of. I think the long stock thesis has a few other elements:

1) At the index level (not so much at the individual issue level) stocks are effectively a risk-free asset. Assuming that the next 30 years in the USA will be like the last 30 years in Japan, with no inflationary breakout, no sovereign debt crisis etc., long term allocators should be rationally willing to drive the ERP far below historical average levels - maybe to 1% or less.

2) The psychological effects of ZIRP/NIRP are enormous. Psychologically, the difference between earning 2.5% and 0.5% on your fixed income is (I'd argue) far greater than a 4.5% vs. 2.5% differential. As you approach the zero bound investors become desperate to obtain any scrap of positive yield which leads to irrational behavior, like bidding up large cap indices to PEs of 40, 50 or beyond.

3) Speculative mania is always a possibility in the stock market and could drive stocks to truly insane levels (like the Nasdaq at 100x PE).

In other words I'm coming from the opposite direction as you are: if long bonds pays off then being long stocks will almost certainly pay off much more, whereas if stocks tank then a bond portfolio is likely bleeding too.

In either case, the most important thing is IMO to look for signs that an inflationary breakout is actually under way, and panic at that time. Alternatively, stocks could get bid up to where there clearly isn't any premium left to be captured (which I think is what will happen over the next 3-5 years). At that point, the days of actually earning something from a passive portfolio will be over, at least for investors holding USD assets.
 
Specterx said:
Sort of. I think the long stock thesis has a few other elements:

1) At the index level (not so much at the individual issue level) stocks are effectively a risk-free asset. Assuming that the next 30 years in the USA will be like the last 30 years in Japan, with no inflationary breakout, no sovereign debt crisis etc., long term allocators should be rationally willing to drive the ERP far below historical average levels - maybe to 1% or less.
More...

Why? This did not happen in Japan even though they had and are expected to have ZIRP until the end of time. Japan stocks are actually cheaper now than they are in the US, even though they were in ZIRP for much longer

Specterx said:
2) The psychological effects of ZIRP/NIRP are enormous. Psychologically, the difference between earning 2.5% and 0.5% on your fixed income is (I'd argue) far greater than a 4.5% vs. 2.5% differential. As you approach the zero bound investors become desperate to obtain any scrap of positive yield which leads to irrational behavior, like bidding up large cap indices to PEs of 40, 50 or beyond.

3) Speculative mania is always a possibility in the stock market and could drive stocks to truly insane levels (like the Nasdaq at 100x PE).

In other words I'm coming from the opposite direction as you are: if long bonds pays off then being long stocks will almost certainly pay off much more, whereas if stocks tank then a bond portfolio is likely bleeding too.

In either case, the most important thing is IMO to look for signs that an inflationary breakout is actually under way, and panic at that time. Alternatively, stocks could get bid up to where there clearly isn't any premium left to be captured (which I think is what will happen over the next 3-5 years). At that point, the days of actually earning something from a passive portfolio will be over, at least for investors holding USD assets.
More...

I'm all for betting on bubbles, I like doing that. Before covid, and I mentioned many times in this journal, I was looking for a melt-up in US equities. However, covid has added things that at the very least should decrease one's allocation to the melt-up thesis

1) The economy it at a depression level of activity and almost no one knows for sure that it will be like after its over. Downside surprises could curb all that speculative activity, people wont be that oblivious to facts i dont think
2)The risk of a UK 1970's style fiscal crisis in the US has risen due to the balooning deficit, federal debt and deficit monetization
3)Stocks are more volatile than ever (not as measured by the VIX) but by the fact that we had the fastest crash of all-time and than one of the fastest rallies of all-time. Its tougher to play the greater fool game when you have to make decisions so quickly. I dont think it will be easy as in you see a bigger CPI print and then unload all shares and all is fine. Many trading legends did not react on time during this sell off, its quite complicated to do that in real-time

That said, I can see QQQ calls making sense, I just wouldnt long actual shares nor I would have a big significant allocation to the thesis
 
Daal said:
Why? This did not happen in Japan even though they had and are expected to have ZIRP until the end of time. Japan stocks are actually cheaper now than they are in the US, even though they were in ZIRP for much longer
More...

It didn't happen in Japan (yet) because Japanese investors could always switch into USD for better value/higher yields, up to the limit of their willingness to tolerate or hedge the currency risk. In the past several years U.S. megacap tech has additionally benefited from the momentum or "story stock" reflexivity flywheel - something clearly still in operation as NDX leads the charge higher. As U.S. indices break new ground in terms of ERP compression you'll see the Nikkei and European indices chased higher as well.
 
You must log in or register to reply here.
Back
Top