Cointreau

Cointreau

If you’re looking to impress your friends at a cocktail party (and I hear those are a thing again, as long as you’ve got your vaccination card), tell everyone April has been defined by “reverse dispersion.”

“What do you hear about the markets, John,” she asked, sipping some chilled Cointreau cliché and feigning refinement.

“Well — I’m sorry what was your name again? — right, Carol. Well, Carol, this month was all about reverse dispersion,” you’ll respond, hopefully over the brim of a simple rocks glass with something ludicrously expensive and brown in it.

By “reverse dispersion,” we just mean that very much contrary to the post-election/Q1 pro-cyclical trade and attendant bond selloff, Q2 kicked off with a reversal, as the bond rout eased allowing secular growth to find its footing and duration to once again lord it over reflation. The figure (below) is far simpler than other, more “accurate” ways to illustrate the dynamic, but it’s also far more accessible for everyday folks.

This is “utterly contra- to the November 2020-March 2021 theme of ‘reflation over duration,’ with the attempted slow unwind of nearly a decade’s worth of legacy ‘Everything Duration’ thematic within US Equities,” Nomura’s Charlie McElligott remarked, in a Wednesday note.

Growth factors may be up 3% or more and cyclical value off by around that much in April, but as Charlie went on to remind folks, the Cyclical Value Factor “remains up a remarkable 29.0% in 2021, while the ‘Secular Growth Factor’ is -2.5%, as bond proxies struggle.”

EPFR data shows a record nine-week inflow into value shares (figure, from BofA, below).

From a sequencing perspective, things are relatively straightforward — or at least that’s the way it seems. Irrespective of this month’s “counterintuitive” action across bonds and equities, the simple inevitability of blockbuster data and the notion that the bear steepener remains “the path of least resistance,” as Charlie put it, means there should “remain a macro-catalyst tailwind behind economically-sensitive ‘Cyclical Value’ [given the] upcoming period of ‘peak base-effect.'”

The assumption is that will coincide with something like herd immunity. It could be hard to lean against that from a sector- / thematic- perspective in equities. “Priced in” or not, it may be too early to get aggressive about fading the reflation theme, especially given likely legislative progress towards infrastructure by the end of July.

Ironically — given that summer is when the US is seen hitting “peak boom,” if you will — markets may be most at risk just as the economy is putting up some of the best numbers on record. In other words, enjoy it, because we could be headed for one of the most dramatic “good news is suddenly bad news” dynamics ever witnessed.

That’s probably too hyperbolic, but at some point, the Fed will at least need to admit that the economy is on fire. They can add as many caveats as they like, but if the labor market ends up recouping, say, half of the remaining slack by July, policymakers will need to recognize that. That’s when tantrum risk creeps in.

For their part, Nomura’s sequencing sees tapering discussions starting to “intensify” in June, and showing up in the June/July minutes. Jackson Hole may be an opportunity for Fed officials to explicitly convey that they’re seeing “substantial further progress.” In September, the statement language could be tweaked to acknowledge such progress is likely to be achieved “in coming months.” In December, a taper announcement is possible.

On Wednesday, McElligott called the summer “risky” in that regard. “The Fed will likely be forced to acknowledge the data overshoot and begin the ‘taper’ discussion as the first step in removing pandemic ’emergency liquidity,'” he said. “That will likely merit a number of ‘risk off’ gyrations between now and then.”


5 thoughts on “Cointreau

  1. “The assumption is that will coincide with something like herd immunity.”

    Right.

    Not if Tucker and the GOP have their way! To paraphrase the always-timid Bess Levin:

    “The only people who wear masks outside are zealots and neurotics,” Carlson told his viewers that, in the midst of a global pandemic, they should go up to people they see wearing masks outdoors and ask them “politely but firmly” to remove the coverings. And if they happen to see kids wearing masks? Dial 911 immediately.

    “As for forcing children to wear masks outside, that should be illegal,” Carlson told viewers. “Your response when you see children wearing masks as they play should be no different from your response to seeing someone beat a kid in Walmart. Call the police immediately, contact child protective services. Keep calling until someone arrives. What you’re looking at is abuse, it’s child abuse and you are morally obligated to attempt to prevent it.”

    He continued: “If it’s your own children being abused, then act accordingly. Let’s say your kids’ school emailed you and announced that every day after lunch, your sixth-grader was going to get punched in the face by a teacher. How would you respond to that? That’s precisely how you should respond when they tell you that your kids have to wear masks on the soccer field. That is unacceptable, it is dangerous, and we should act like it, because it is. But too few of us have responded like that, we have been shamefully passive in the face of all of this.”

  2. While i don’t agree with the sentiment, i have never worn a mask outside. I don’t think i feel the need to unless i was in a very crowded area. However, i do wear one inside buildings.

    1. “I don’t think i feel the need to”… ?!

      Look, wear one, don’t wear one, whatev’. The science is somewhat partial and it’s up to you to decide if 95% safe (or whatever the true percentage actually is) is good enough. I’d bet I’d never manage to convince you to take a ride on a russian mountain attraction that was 95% safe but whatev.

      That said, beyond the imprecision of the science and the bizarro attitude to risk, even if an activity is 99% safe, it doesn’t mean much if tens of millions are doing it. How much is 99% of 10,000,000? Are you sure your local health care providers can handle the results of a 99% safe behaviour?

  3. People are afraid is one reason they wear masks outside. To further punish these people as bullying by any definition. I guess if you’re a confirmed fascist, like Tucker who said we will likely have a fascist nomination from the Republicans in a few years, that probably counts as polite society.

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