Welcome to the End
“The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.” – Winston Churchill
Whether the majority realize it or not now, the crowd will soon enough. We are nearing the end of one of the most incredible intermarket disconnects in modern times as the relationship of bonds to stocks nears a breaking point.
I don’t care what you hear in the media. We should all want to see rising rates. Rising rates means growth and inflation expectations are rising in a fiat economy. It signals a healthy demand for money. It signals an environment of expanding profits.
Markets rallied strongly last week. Brexit became Bridiculous. Stocks in the S&P 500 staged a stunning comeback after a complete worldwide 2 day crash. Feels safe, right? Problem is what led markets higher was all the wrong stuff. Defensives led stocks. Utilities have been absolutely crushing it. This matters because as shown in the 2014 Dow Award winning paper I co-authored (available here to download), Utilities have tended to be a leading indicator of volatility in the past.
I have said it before, and I will say it again. The behavior of bonds is wildly disturbing globally, and the US is not immune. If bonds are right, then a deflation tsunami is coming. And that means stocks likely have a lot of downside and volatility to come in the years ahead.
If bonds are right, we are at the end of the bull markets and period of low volatility for stocks. But are bonds right? Maybe not. If indeed stocks are right about the future, then it is the end of the bond rally, and rising rates finally will come. We should all be cheering for that to be the case. Either way though, I believe we are nearing the end of one of the most historic disconnects of all time. When we find out the answer of who is right is unclear. Every day that goes by though, we are closer to one class of investors being dangerously wrong. For now, our Beta Rotation Index (click here to view) remains in defense mode. Short-term, the weather isn’t looking so hot for risk assets. Long-term? The weather depends purely on if bonds are right.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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