Update of the Structural Bear-killer post
Late in January I was worried about having been too cautious since end-December yet too late to the party to add risk. I posted some charts showing that the odds were decent that the shift afoot was structural in nature, unlike the stop and go markets of the past two years. These charts made me more confident to go with the flow. Here is an update of those charts. And, sadly for the Policy Bears, the song remains the same.
The 2s-10s steepener trend looks robust, not tired. A great sign for risk taking.
EURAUD and EURCHF are signs of financial normalization. Don’t worry that AUD is considered a growth currency (more on this below), the bigger signal is that people are crawling out of their bunkers.
Mortgage rates (above) look set to go higher. Wait. Isn’t this bad for housing and therefore for the overall US recovery?
Answer: no, for two reasons. One, from a financial point of view it shows investors are moving out the risk spectrum. And two, price hasn’t been holding buyers back. Down payments, job security, and tighter lending standard have. Levels are still plenty low enough for solid borrowers who can make the down payment to buy.
If indeed this is the structural shift in risk taking that it appears to be, it will be more about normalizing financial risk appetite than a rapid acceleration in growth—either here in the US or globally. This means the reflexive reach for commodities and commodity proxies (e.g. AUD) that has accompanied every risk impulse for the past five years may come a cropper this time—particularly since we have seen behind the Great Monetary Curtain and realize the machine is being run by mortals (i.e. The broader money supply is endogenous, and is driven by risk appetite and not money printing).
The portfolio implication for the investor? Structurally long equities, hedged with structural commodity shorts.