YWR: Fake Left. Go Right!
Disclosure: These are personal views and market commentary only. Not investment recommendations. For that seek professional help!
We are dedicating this week’s charts to Barry Sanders.
The master of fake left, go right.
I see it everywhere. Or versions of the same thing.
It’s the long bond, economic slowdown, inflation falling trade.
Investors are the most convinced they’ve EVER been that rates will go lower next year. Even more convinced than they were at the end of the financial crisis.
This is the most important chart in the market right now, because it tells you this forecast is going to be wrong.
And here is the positioning version of that view from the BofA December Fund Manager Survey. Go long bonds and underweight commodities because… you know…. China is slow… the Fed has raised rates and commodities are dead….
Here is another version of this trade from the Goldman Prime desk. Hedge Funds are long defensives and underweight cyclicals. I would add ‘tech’ as a defensive trade too. The idea is tech works even if the economy is weak because it is structural growth.
What you don't want to own are banks, real estate, autos, miners, oil and airlines. The Untouchables.
I always take CFTC positioning data with a grain of salt, but here is the net asset money manager positioning in 2’s, 5’s and 10’s. Long up the wazoo. Especially 2’s.
We also have historic inflows into cash. Which is defensive. 5% seems pretty good, especially when there is the risk of a recession.
Kind of interesting what happens to the money market flows when recession fears decline.
And why not be long bonds and cash? Because the economy is going to be weak and inflation will be lower. Right?
There was a time for the long 10 Year trade (It’s 10 year time) back in November, but I think that move is done.
It’s time to do a Barry Sanders and cut the other way.
The surprise for 2024 is going to be:
Bond yields rise from here.
Fed doesn’t cut, or cuts less than expected
Inflation is higher than expected.
Commodities outperform
But how can this happen when everyone is so sure inflation will fall in 2024? I mean the Fed has raised rates, and the transitory inflation is finally falling. Yes, it’s still 4%, but the direction is down. Surely, it’s just a matter of time.
What could change?
I see 3 surprises which could challenge this consensus positioning and outlook.