No Peace

Tech just can’t get out of its own way.

Or, more aptly, bonds just won’t get out of tech’s way.

This week was a fitful, spasmodic exercise in the type of “churn” discussed here at length on Wednesday. It culminated Friday in another awkward session that found yields rising sharply, pressuring tech anew.

It’s virtually impossible to make the case that overvalued pandemic stocks, high-flying tech shares, and other perennial, secular growth winners have de-rated enough to make them “bargains.” So, in the face of surging US yields, dip-buyers are compelled to hang their hats on the “buying great companies” excuse. That’s fine, except that nobody was arguing Apple (for example) isn’t a great company.

The problem, rather, is that the whole thing looks perilously close to tipping over or otherwise buckling under its own weight. By “the whole thing” I mean the yearslong “duration infatuation,” which translated into parabolic outperformance of deflation assets over inflation assets, growth over value, and any number of other combinations used to express the same general macro theme.

Now, the “slow-flation” regime may be at an end. Even the likes of Albert Edwards admit that fiscal-monetary partnerships, overt debt monetization, and out-in-the-open deficit financing may spell the end for the four-decade bond bull. (Edwards still thinks there’s another deflationary cold front coming before we see yields rise in earnest, but he’s increasingly predisposed to discussing a “great melt.”)

On Friday, the popular long-end ETF fell into a bear market as 10-year US yields pressed up through 1.64%. The market will look for Fed pushback next week as traders (not to mention banks) await word on SLR exemptions.

“We believe 2020 marked a secular low point for inflation and rates,” BofA’s Michael Hartnett said. He cited “new central bank mandates, excess fiscal stimulus including UBI, less globalization, and fading deflation from disruption, demographics, and debt” before noting that going forward, the cyclical drivers are “reopening, vaccination and policy stimulus.”

If you’re looking to read the tea leaves, Hartnett called recent outperformance from “the inflationary Russell” versus the “deflationary Nasdaq” (second figure above) a harbinger. The Nasdaq 100 apparently “topping” versus the S&P constitutes a “thematic confirmation,” he went on to remark.

The roundtrip in bond yields is mirrored across all manner of assets and indicators. The table (below) from BofA is a handy guide.

Like it never happened. Well, except for the 2.6 million dead globally from COVID. And countless shuttered businesses and shattered lives, many of which will likely never reopen or recover, respectively.

While the world may find some peace in the vaccination push, and as the US economy looks poised to stage something like a sustainable rebound on the back of nearly $2 trillion in new stimulus, markets may remain restless as investors learn to cope with a macro regime unseen in decades.

Writing on Friday, SocGen’s Kit Juckes said they’ll “be no peace before we get US 10s to 2%.”

“The pattern seems clear enough: The equity market is seeing a sector rotation but not a correction; the bond market is seeking a new equilibrium in the light of a vastly improved economic outlook in both the US and elsewhere; some policymakers are pushing back against the bond moves, with little success,” Juckes wrote, adding that,

As yields rise, the dollar rallies, but when yields settle at a new level, the dollar drops back. The pattern probably goes on until bonds find an equilibrium, unlikely before 10-year Note yields have a 2-handle, judging by taper tantrums and past cycles. The sooner we get there the better.