On Monday, while documenting what I generically described as “a month to remember” (usually I try to be a little more creative than that if I’m going to resort to superlatives), I wrote that November 2020 may ultimately prove to be just another false start when it comes to outperformance from cyclical value.
If, in hindsight, November’s rotation does appear as just the latest “head fake,” it will nevertheless stand out for being dramatic.
One defining characteristic of equity markets over the past decade has been growth’s perennial outperformance, a phenomenon tied to the “slow-flation” macro backdrop and the vaunted “duration infatuation” in rates. By contrast, value shares had their best month on record in November. Small-caps staged a similarly historic rally.
Commenting on Tuesday, Nomura’s Charlie McElligott called it “one heck of a quarter-to-date reversal from the past 10 years worth of [the] ‘everything duration’ trade narrative into a much more pro-cyclical, reflationary, high-beta pivot.”
To assist in driving home the point, he broke down EPFR flows, flagging four straight weeks of inflows into financials, three consecutive weekly inflows into industrials and energy, and $1.2 billion into materials over the past four weeks. By contrast, real estate, tech, utilities, and staples all saw outflows over the past one-week tabulation period.
Crucially, all of this is playing out against the easiest financial conditions ever, thanks to what McElligott described as “the potent combination of all-out monetary easing and unprecedented lending from central banks, in conjunction with the prospects for [a] pandemic-driven unshackling of fiscal stimulus.”
And speaking of those prospects (i.e., the outlook for “big league” fiscal spending), Charlie called Janet Yellen’s Treasury nomination “a symbolic further evolution of central banking- and Treasury- roles merging into one harmonized debt-monetization monster.”
That’s some classic McElligott-speak for you. “Now you’re cookin’ with grease on that ‘unprecedented deficit spending’ thesis,” he added.
Indeed we are “cookin’ with grease” now, and virtually every utterance from Fed officials and incoming members of the Biden administration contains some mention of inequality and using policy (both monetary and fiscal) to ameliorate the myriad inequities endemic in American capitalism.
“We face great challenges as a country right now. To recover, we must restore the American dream—a society where each person can rise to their potential and dream even bigger for their children,” Yellen declared Monday, in her first tweet as incoming Treasury Secretary.
Importantly, you don’t need to be a “socialist” to recognize that inequities are, in fact, endemic. Just ask Jamie Dimon or Ray Dalio whether capitalism is “broken” in America. You might say they’re just “virtue signaling” when they critique the very system that’s made them hugely wealthy. But that doesn’t make them wrong — it just makes them hypocrites. And I’ll tell you something: I’m generally fine with hypocrites as long as they’re telling the truth.
Anyway, getting back to Charlie, he flagged the Georgia runoffs as “the first hurdle to clear” in 2021. He called the contests “utterly binary.” Either markets will need to price in the realization of a “blue wave” overnight, or they won’t.
If the GOP holds, as expected, some version of the status quo (i.e., Beltway gridlock) will be our reality. As McElligott notes, that would entail “monetary policy interventions being perpetually required of the Fed” which, in turn, would likely mean a “continuation of this current ‘everything up’ environment, via benevolent monetary [policy] and [a] stimulative fiscal policy outlook,” albeit with far less “oomph” than you’d get under a unified Democratic government.
As far as the longer-term outlook, McElligott says he’s still “sympathetic” to the deflation camp. “The majority of investors and trigger-pullers I speak with continue to doubt the ability to sustainably maintain a reflationary impulse with a (negative) output gap and the ‘3Ds'” in play.
I too am sympathetic to that. In fact, I was just having this discussion with one trader over the weekend. In the US, the same endemic inequities and biases that define our socioeconomic reality also serve to limit the extent to which monetary policy on its own can generate inflation. As one famous African American recently put it, “black lives matter ’til I need a loan [and my] credit score’s good ’til I want to buy a home.” (For the record, that particular entertainer would have no trouble getting a loan or buying any home he wanted, but his point is duly noted.)
That reality affects the velocity of money and thereby impairs the monetary policy transmission channel.
As McElligott noted Tuesday, many of the folks he speaks to “continue to view attempts at ‘credit/lending pumping’ at the zero bound as akin to ‘pushing on a string.'”
Maybe we’re gonna need more grease to get cookin’ in earnest.