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Distortions and Crazy Ideas

We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising since the BoJ adopted negative rates; stocks rising amid a persistent decline in earnings growth; bonds, gold and stocks moving in unison, etc., etc.).

 

puzzled-man-scratching-headUnknown veteran trader experiences another WTF moment.

Photo credit: Everett Collection

 

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Mining Stocks, Gold Prices and Commodity Price Trends

Gold has gone up >400% over the last 16 years. Ironically, it is hard to find a gold mining equity exhibiting similar performance. In retrospect, if one invested in gold, one not only made much better returns, one also took a relatively insignificant risk in comparison to owning equities—equities can go to zero while it is hard for a commodity to fall much below its cost of production. Moreover, depending on the jurisdiction, owning gold might have resulted in lower (or no) tax liabilities.

 

South DeepSouth Deep gold mine in South Africa

Photo via mining.com

 

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Insanity Rules

Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn’t matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.

 

Perfect-InvestmentThe perfect investment for modern times: interest-free risk!

Illuustration by Howard McWilliam

 

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Mark Carney, Wrecking Ball

For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame).

 

Mark Carney starts work as Bank of England governor in Dave Simonds cartoonThis is how Mark Carney is seen by the press. A few decades ago no-one would have thought that the drab bureaucrats inhabiting central banks would ever get this much attention, and yet, here we are. It’s like living in a really bad B-movie.

Cartoon via theguardian.com

 

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Another Strong Payrolls Report – is it Meaningful?

This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong?

 

Factories, new vs oldQuo vadis, economy?

Image credit: Paul Raphaelson

 

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Anecdotal Skepticism vs. Actual Data

About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.

 robot tradersThe bots keep buying…

Illustration via carolublog.wordpress.com

 

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The Sharp Move in the VIX Accelerates

In Monday’s trading session, the upward move in the volatility index VIX (which measures the implied volatility of SPX options) continued unabated, vastly out of proportion with the move in the underlying stock index. “Brexit” fears continue to grow, which has apparently been the driving force behind this move.

 

Una manifestazione a favore di Brexit a LondraThe “Brexiteers” are gaining support as the referendum date draws closer – global financial markets are getting somewhat upset over this.

Photo credit: Neil Hall / Reuters

 

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European Stocks Look Really Bad…

Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound’s volatility.

 

BunkerBattening down the hatches…

 

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Commercial and Non-Commercial Market Participants

The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn’t it obvious? Superficially, it sure looks that way.

 

kilogold-pamp-3

 

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Pros and Cons

The recent rally in commodity prices has surprised many market participants and has greatly supported the stock market’s rebound. It has also made bulls out of a number of former stock market bears, as one of its side effects was to cause an improvement in market internals. But does the rally actually make sense?

 

bethlehem steelThe original Bethlehem Steel Works in Bethlehem, Pennsylvania.

Photo via leggendaurbana.it

 

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Damned If You Do…

After waking up on Thursday, we quickly glanced at the overnight market action in Asia and noticed that the Nikkei had tanked rather noticeably. Our first thought upon seeing this was “must be the yen” – and so it was:

 

1-Yen, June, dailyJune yen futures, daily – taking off again – click to enlarge.

 

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The Inflation Illusion

We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates.

We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of interest we have to subtract inflation from the nominal rate, so to speak remove the illusion of inflation.

 

1-real FF rateThe “real” federal funds rate (effective FF rate minus CPI-U y/y rate of change)

 

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