Premium: Are we buying tech again?

Here's what I mentioned in the Discord last night...

I am holding firm on EURGBP short til next week - I feel what’s happening now is month end related but I don’t reckon it’s the right time to exit. In from 45, trading 32, but got hit on it last week so wary of taking another loss on the pair.

Rotation into bonds this week has been fast and hasn’t had much let up. Stocks settle t+2 so perhaps all this selling will be done by week end, lower yields/growth recalibrate and growth gets bid up next week.

What did I mean?

Well, consider the status of sterling.

It's a high beta currency.

That means it's sensitive to risk (for the 150th time, but just want to make it clear where I'm going with this).

If the NASDAQ comes off, sterling usually follows, the same with AUD, NZD and CAD.

But since I'm short EURGBP, the focus is on sterling.

That rebalancing thingy

Next, we look at the aims of funds at quarter end.

Traditional rebalancing involves trading the gains of well-performing assets, by selling high, for more low-performing assets, by buying low, at the end of each quarter.

Theoretically, this serves to protect a portfolio from being too exposed or straying too far from its original strategy.

However, pegging rebalances to the end of quarters relies on arbitrary calendar events which may not coincide with market movements.

But, the confluence of new reports that emerge at the end of quarters usually causes market reactions and should be of concern to most participants.

I think what we're seeing this week is a rebalance from equities to the DECIMATED bonds.

Check out TLT vs QQQ over the last couple of days...

We've seen tech fall off and bonds take the driver's seat.What we might be able to deduce here, is that even though yields have fallen, so has tech.

This has not been the usual relationship over the past few years, where bonds and risk assets have moved in lockstep, which leads me to believe that something more micro is occurring.

See the US 10y yield vs QQQ.

What we should note is that the relationship between lower yields and higher growth stocks should converge, since the whole reason why the perform is due to their future cashflows being discounted less.

By filtering down onto a more micro event like this, we can perhaps discern that this 'bonds up' relationship isn't really born out of fear, and it's likely that risk assets should recalibrate sooner rather than later.

Tea for two?

Have you ever wondered what T+n means?

When you buy an asset, the settlement isn't instantaneous.

That would need the blockchain...

No, genuinely, I think this could be a good use of the blockchain but let's get to that at another time.

Securities used to settle T+5 (five days after the trade was made).

Now they settle T+2, the same as FX, which is why you get a triple rollover on Wednesdays if you hold overnight 'til Thursday since it accounts for the weekend.

I think if we are accounting for this settlement measurement, it might give some kind of inference as to when we could see stocks push higher again.

And I'd argue that buying the NASDAQ or NQ again could be a half decent bet, especially if we're looking for a real run up starting Friday and continuing into next week.

Reaffirming that lower yields, higher growth relationship would be conducive to what we've seen for a long time, and would 'make sense', if you like.

Is a whale jumping on the bandwagon again?

Here's what came through the wires as I was writing...

Let's take the first headline.

If Jordan doesn't believe the market is going to overheat, what does that imply for inflation moving forward?

What is he signalling about the SNB's own activities?

Well, let's take a look at their NASDAQ holdings!

They have a market value of $140bn of NASDAQ stocks as of the end of December.

This has likely changed more of late as the market has fallen off, but what does that potentially imply in and of itself?

They're probably prepared to buy more.

Since their monetary policy to try to keep the franc weak works by them printing and purchasing US stocks, they are a big, big whale in these large caps, with no real reason to stop.

And they make a hefty profit from these activities.

And that is noted by Jordan's second statement.

He has no fears about expanding the balance sheet.

This would imply more buying, and what a prime level to be doing this at!

Focus back on yields

You know my stance on yields by now.

I don't think they're going to go out of control, and as a result, they're indicating inflation in the short term and not the mid-term.

I really reckon we've just played a bit of reversion to the mean...

You can read my updated thoughts on inflation below 👇

And we should pay particular attention to the below chart, especially in light of recent events in the Suez Canal.

With containers priced this high, but seeing a recent dip, I fully expect inflation expectations to start to falter and to really take the burn off the inflation hype.

This is certainly a leading indicator, since a 233% increase in goods transport over the course of a year is totally abnormal.

Here's what Drewry had to say on this.

Shippers and BCO’s still have to pay incredibly high rates for a sub optimal service, and in many cases find themselves obliged to pay over market spot rates to guarantee equipment and space availability - with shipments to major US ports and the UK subject to further surcharges.

You've got to be blind to think that this isn't where inflation is being seen.

And if we compare this to the 10y yield, we see that the yield started rising just as the cost of containers started increasing massively.

With these factors included, I see the path of least resistance in the near future being to the upside for tech.

It makes most sense.

#DeathToInflationistas