Are the markets at a crossroad?
Abraham George Macro View
In the last few decades those who made serious money in the markets falls in two camps. One who clearly felt that inflation is dead and this divergence between inflation and deflation will only continue. If you invested with that view, then you must have done extremely well for the last 35 years or so. The other group is one who didn’t care about any changes in inflation or deflation but went with the flow and momentum of the markets and was invested in quality growth stocks and bonds.
As we have been highlighting for many weeks, we believe the divergence between inflationary and deflationary assets are going to narrow. What historical evidences do we have? We can think of two clear instances. First one was in 1941. It was the end of the Depression and big government spending was carved out through the so called The New Deal. Inflation ramped up to double digits in 1942. The second was in 1973. During the Oil crisis. Inflation ramped up to double digits in 1974.
Those were historic periods when inflation assets outperformed. It is very difficult to detect them in its early stages. The signs of a probable break up in inflation are already there. As someone sent a tweet to me “for everything that you didn’t understand with Bitcoin, Reddit short selling, credit default swaps and a million other things, it’s so refreshing to hear that global commerce is in peril because a big boat got stuck in a canal.”
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Equities
We have pointed to a wide array of measures that probably is leading to a loss of speculative fervor in the markets. Add to that the 5 - day average of total US call option volume has dropped by 33% in last 40 days or so. The number of stocks making new highs have dropped by 30% or so. The CBOE Volatility Index (VIX) closed at 18.86 the lowest level since Feb 21, 2020 when it closed at 17.08. It is an indication that with many other things that we have highlighted the level of complacency is also very high.
Nothing goes in a straight line. Contrary to our expectations the markets traded up to 3978 on Friday falling short of the all time high of 3984 on Mar 17 in the S&P 500. If a new high is made today it can challenge 4012 or even up to 4035 to 4065.
Bonds
Bonds rose to 157^08 on Thursday ( Mar 25 ) and fell back to 155^10 on Friday. Another rise can top out anywhere between 158^28 to 161^26. However a close below 154^02 will diminish these odds and increase the possibilities of much bigger falls.
Euro
The Euro decline should progress to the 1.1600 handle as long as the 1.1830 to 1.1845 area remains capped.
Gold
Gold has not been doing much since it posted a high 1756. It is undergoing a complex correction. If it does not break soon below the lows of Mar 08th there are chances it will break above the Mar 18 high to post 1765 to 1775 range before it tops out again.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.