As The Pendulum Swings
We're back to worrying about whether the mega-cap leadership can stomach higher bond yields. "Mega-cap tech getting hit as Treasury yields climb," read one headline on Monday.
A couple of weeks back, in the course of recapping a series of familiar talking points, I mentioned that the biggest risk from extreme index concentration might not necessarily be the concentration itself, but rather the extent to which the secular growth trade (of which mega-tech is representative), is tethered so closel
In between pendulum swings, time ticks away …
Summarised in the slogan “We can know more than we can tell”, Polanyi’s paradox is mainly to explain the cognitive phenomenon that there exist many tasks which we, human beings, understand intuitively how to perform but cannot verbalize the rules or procedures behind it.[2]
This “self-ignorance” is common to many human activities, from driving a car in traffic to face recognition.[3] As Polanyi argues, humans are relying on their tacit knowledge, which is difficult to adequately express by verbal means, when engaging these tasks.[2] Polanyi’s paradox has been widely considered a major obstacle in the fields of AI and automation, since the absence of consciously accessible knowledge creates tremendous difficulty in programming.[4]
Just one thought, barely related to the post but this is a convenient place to put it.
“Delta” is over, as a market factor. The US new case curve peaked two weeks ago and is plunging. Other Covid metrics – deaths, hospitalizations, whatever – are lagging so don’t matter (to the markets). Look at stocks: vaccine and Covid test names are rolling over while reopening names are hooking up.
This shouldn’t be a surprise. We’ve discussed before that “peak Delta” would be in September.
Delta was one of the two largest risk factors in the last few months, and its end is bullish. A bad Fed surprise was the other largest risk factor, but that’s also largely receded; the coming taper is no longer a “surprise”, if it ever was.
There are, as always, new things to worry about. China power shortages, debt ceiling, more Evergrande fallout, etc. None of these are as threatening as the pair of Delta & Fed were.
For me, the only believable reasons that Delta should be over, is that either we have achieved herd immunity, or that vaccination rates are up.
If not, then we’re just set up for the next wave after this one.
I don’t have a strong opinion about whether there will be a next big Covid wave in the US.
The argument for “no” is that some 80-90% of US has some degree of immunity now, from vaccination or from having had Covid (that is the claim, I haven’t done the modeling).
The argument for “yes” is that immunity wanes and new variants can develop a degree of immune evasion.
Stock behavior suggests that investors favor “no”, because companies are generally not being rewarded for clinical data, EUA, or even approval of new Covid therapeutics or vaccines. Granted, investors are not necessarily gifted at predicting pandemic behavior.
The situation varies by country. Asia is in a different boat. India likely has even more widespread immunity than the US.
The point, though, is that whether there is a next Covid variant wave with a different Greek letter, or not, Delta’s wave in the US is ending. In the real world, it is declining weekly. As an investment risk, it’s over.
In October 2018 we saw the same dynamics. Yields rose and equity ignored it for some days on the narrative that yields hinted at solid growth and rising EPS could absorb the yield rise. Then the oil debacle came, linked also to the Kashoggi murder matter. Suddenly the narrative made a 180° upside down turn, and it changed into the spectre of rising yields + deflation, equity was mistakening the real reasons for the oil debacle and assuming it was a sign of global slowdown. Let’s see if Evergrande + chip shortage + energy crunch changes that again. Oddly oil was at 80$, same level as today.
I add that central banks + fiscal policies can sustain demand, they are impotent if the shock comes from supply.
Personally I think a secular equity decline will start in some months but we will see a final surge before that. Current energy/supply chain issues will be solved, it’s like a queue forming after an accident on a highway. Even if cars 10 miles ahead are moving slowly you are still. There is whole math explaining how a queue forms, develops, and slowly dissolves.
The reasons I believe a stock market decline is coming is for another comment another day