Cognitive dissonance!

Abraham George Macro View

The uncertainty surrounding the elections are slowly dying down and the markets are trying to rally again. Since the March lows markets have risen close to 66% . The unprecedented sea of liquidity that various central banks have created is being undermined.

What probably is not being appreciated is that apart from the trillions of dollars that is pumped into the economy, the Fed also removed the reserve requirement ratio for banks. It is now at zero! At a zero reserve requirement ratio, the stock of money can increase infinitely. Meaning the value of money has been destroyed, which means asset prices has to go up. Cash is the worst place to be in. We have to be long asset prices. That’s all on one side of the equation.

But what’s history and the sentiment indicators telling you. If you go down that path you are caught up in cognitive dissonance.

Optimism for the markets have never been this high before. The weekly investors intelligence advisors survey rose to 65 %, the second highest level in 33 years since 1987. The CBOE equity put/call ratio shows another extreme. On 24 Nov the ratio closed at .38. The last time it closed lower than that level was in April 2010 at .37. The current reading of 106.40 in the national association of active investment Managers exposure index is compatible with the extremes in the P/C equity ratio. A 100 reading in the index means that that the managers are fully invested. A level of 106.40 means that managers are more than fully invested.

Active managers herd like sheep. They become more optimistic as stocks rally and more pessimistic as stocks decline. When if reaches an extreme it is time to reverse.

Tesla could be the perfect embodiment of the current mania in tech and in particular for electric autos. Since the announcement on Nov 16 that the stock will be added in the S&P index on Dec 21, the stock has rallied 40% making the 2020 rally a whopping 610%. According to all measures, Tesla price is fully insane. Technically everything is pointing to a major shake out.

Equities

The Dow made a new high on Nov 24 which was not supported by the S&P 500 index. The extreme on S&P was at 3646 on Nov 09. There are several possibilities here but the risk is more weighed to the downside.

Bonds

Bonds were again in a complex correction to the upside but we continue to remain bearish. Yields are expected to rise substantially which means bonds have to trade much lower.

Euro

The euro has moved into the 1.1900 handle . Chances are it will rise above 1.2010 the Sep 01 high. It can also top out at 1.1930 and move down to 1.1800 before it starts to move higher.

Gold

On gold we were clearly against the general consensus of the market and we are right. Gold can drop as low as 1760 or even 1670. We will see how price unfolds.

We have a very long weekend ahead of of us with Thanksgiving on Thursday. Friday is a half day and it is as good as a holiday. So the next report will be on Tuesday. Do enjoy your long weekend.

Happy Thanksgiving!

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.